The financial regulators are compiling a list of tax havens to make it impossible for their financial entities to get the coveted FII status in the country.

RBI and Sebi are being asked to prepare the negative list of tax havens, according to a finance ministry note circulated at the economic editors conference on Tuesday. This is expected to make it easier for genuine hedge funds to be registered here, as the government is also trying to plug loopholes in the various double taxation avoidance treaties with some known tax havens such as Mauritius to prevent their misuse.

It has also made clear its comfort level with the prevalence of participatory notes (PN) in the stock markets. The ministry has said it will not press for making changes in the Sebi (FII) guidelines to give the regulator more powers to ask for details of PN holders. The data on PNs do not show a substantial increase in the value of PN as a proportion of total FII investment. So, there is no concern of their disproportionate influence on market behaviour, the note adds.

The comments by the ministry on the major recommendations of the Ashok Lahiri report on FII flows show it is keen to push for a well-regulated stock market that actively encourages flow of quality capital from abroad. However, as a note of caution, it says the government will study the global regulatory experience on hedge funds before a policy on hedge funds is finalised.

Meanwhile, the practice of limiting an FIIs exposure to 10% of a companys equity will continue, said the finance ministry. Domestic financial sector regulators RBI and the Sebi have to apply the common beneficial ownership criteria to restrict individual investment limit in the case of FII and its sub-accounts, the ministry note says. The expert group under the chairmanship of Ashok Lahiri, chief economic adviser to the finance ministry, had favoured an investment limit of 10% on an FII including its sub-accounts. However, it had added the caveat that the requirement may be phased over a five-year period. The government may further liberalise the debt flows for FIIs. The government has also advised Sebi to continue with the practice of not permitting high net worth individuals to be registered as sub-accounts. This is in line with the regulatory concerns expressed by the Lahiri panel.